The FDIC released numbers for the third quarter of 2009 and they weren't pretty. While banks earned a bit more money, losses continued, more banks were added to the problem list, total loans declined, and the FDIC needed to tap an emergency assessment to keep from running out of cash.

Key highlights of the press release include:

• Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $2.8 billion in the third quarter of 2009, more than three times the $879 million the industry earned a year earlier.
• More than 26 percent of all insured institutions reported a net loss in the latest quarter, up slightly from nearly 25 percent a year earlier.
• Loan balances declined by the largest percentage since quarterly reporting began in 1984.
• Insured institutions charged off $50.8 billion in uncollectible loans during the quarter, up from $28.1 billion a year earlier, and noncurrent loans and leases increased by $34.7 billion during the third quarter.
• Net interest margins improved to a four-year high. This is what contributed to bank profits. Banks are able to borrow money at 0% from the Fed or 1% from depositors and loan it out for 5%. It's impossible not to make money in the environment engineered by the Fed to saved the banks.
• At the end of September, there were 552 insured institutions on the "Problem List," up from 416 on June 30. This is the largest number of "problem" institutions since December 31, 1993, when there were 575 institutions on the list. Total assets on the problem list increased to $345 billion. If we assume that in a worse case scenario all of these banks fail, and the FDIC is on the hook for 10% of the problem assets, that's an extra $35 billion the FDIC must pay out. Which brings us to the next point...
• As projected in September, the FDIC's Deposit Insurance Fund (DIF) balance – or the net worth of the fund – fell below zero for the first time since the third quarter of 1992. The fund balance of negative $8.2 billion as of September already reflects a $38.9 billion contingent loss reserve that has been set aside to cover estimated losses over the next year. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings over the next year. Combining the fund balance with this contingent loss reserve shows total DIF reserves with a positive balance of $30.7 billion.

So, there you have it. Banks are still struggling, the FDIC is fighting hard to keep up, and more bank closings are coming.

This week the discussion continued about whether the Fed's 0% rate policy is leading to the creation of asset bubbles. Chinese and Japense central bankers went on record as stating that the Fed's policy has already led to asset bubbles in Asia that could create global imbalances. In particular, they were referring to the carry trade, in which investors borrow money in a country with low interest rates and invest it in a country with strong asset price growth or higher rates of return. "Liu Mingkang, China’s chief banking regulator, said that the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”….

Bill Gross from Pimco probably got it right when he said:

"The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks . Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until. To date that transition is incomplete, mainly because mortgage refinancing and the purchase of new homes is being thwarted by significant changes in down payment requirements. The Treasury as well, has a significant average life extension of its own debt to foist on investors before the Fed can raise short-term Fed Funds."

The only good news for savers is that inflation for goods and services remains relatively subdued. The CPI rose by .3% in October. The index has decreased by .2% over the past 12 months. Leading the increase in October was energy and automobiles. While energy prices will probably continue to rise, look for auto prices to fall back now that cash-for-clunkers is over and the government is no longer subsidizing car purchases. Overall though, there is nothing on the goods and services inflation front that would push the Fed to raise rates.

The only inflation seems to be in assets and Bernanke doesn't believe this presents a problem at the moment.

CD and Savings Rates

CD and savings rates showed virtually no movement over the past week. The average savings rate according to the BestCashCow rate tables dropped one basis point to a new low of 1.62% APY. That's down from 1.70% APY a month ago. CD rates have mostly stabilized. The average one year CD rate is now 2.08% APY. That's up slightly from the last week and virtually the same average rate that we saw in October. For the fourth week-in-a-row 5 year CD rates held at 3.35% APY.

Looking at the yield ratio we have developed for deposit accounts, we see that the spread between savings rates and 36-month CDs is still close to its 12 month high. While it came down slightly, the trend is still up. This reflects the rate stability in longer term CD rates even as savings rates continue their glacial descent. The story is really the weakness in savings rates and the continued 0% Fed rate policy. That's driving the ratio. Banks are still awash in cash and cheap money from the Fed and the Fed's policy of keeping rates low for an extended period of time is going to drive this ratio higher.

It's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with soaring equity markets and signs that the economy may be coming back to life. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.

Mortgage Rates

Mortgage rates have declined over the past three weeks, touching lows not seen since last April when the Fed began buying up mortgage backed debt. According to the BestCashCow rate tables, the average 30-year fixed rate mortgage is now below 5% at 4.901%. The fifteen-year fixed rate mortgage average is 4.373%, close to the all-time low.

What one hand giveth, the other taketh. And so it is that savers are subsidizing borrowers. I could provide a scathing commentary on this but will simply say that if you can't beat them, join them. If you are looking to buy or refinance, now is another great opportunity to do so. You can compare the best mortgage rates in our new Mortgage section.

Bank of America is offering a Special Rate Savings Account that pays 1.5% APY, guaranteed until April 1, 2009. The money is totally liquid and can be withdrawn at any time via the branch, ATM, check, or online. You can also add money to the savings account up until the April 1 deadline.

According to the BestCashCow rate tables, this is moderately competitive compared to the other top savings rates. Still, the guaranteed rate makes this attractive and the 1.5% APR looks pretty good when compared to the best 3-month cd rates and 6-month cd rates. In essence, you are getting a liquid CD that pays near the top of the short-term CD rate ranges.

The "special rate" is available online only for new or existing Bank of America checking account customers who open a new Special Rate Money Market Savings account with a minimum of $10,000. Special 1.50% rate applies only to balances between $10,000 and $250,000 from November 7, 2009 to April 1, 2010. The APY for balances under $10,000 is 0.90% as of 11/06/09. The APY for amounts $250,000 and over is 1.15% as of 11/06/09.

After April 1, the Special Rate Money Market Savings account automatically converts to a Growth Money Market Savings. As of today, November 17, the Growth Money Market Savings Account was offering a .95% APY on balances over $25,000. A bonus APY of 1.20% APY applies if a credit is received into the Growth Money Market each month via one of these three ways:

• An automatic transfer of $250 or more from your Bank of America checking account
• An automatic transfer of the monthly interest payment from your Bank of America CD
• A direct deposit of $250 or more.

The account has a tiered rate system so there are lower minimum balances but the APY is also lower. 1.2% isn't bad but it's starting to get low for a BestCashCow covered account. I think once the Special Rate expires savers should compare all of their options.

The account can only be opened online.